The FBI has a photo of Scott London, left, accepting cash in an insider-trading sting. Source: “Exhibit A” from FBI criminal complaint filed today against London.

BULLETIN: (UPDATED 4:44 P.M. EDT U.S.A.) The SEC has gone to federal court in the Central District of California, accusing a former KPMG “lead partner” and auditor of KPMG’s Herbalife account of insider trading by providing nonpublic information on Herbalife and other companies to a golfing buddy.

Scott London, 50, of Agoura Hills, Calif., was fired last week by KPMG. He now stands formally accused of passing information unlawfully to Bryan Shaw, who also has been charged. Shaw, 52, lives in Lake Sherwood, Calif., and operates a jewelry business in Encino, the SEC said.

The men met at a country club and became close friends, the SEC charged.

London has claimed he wanted to help Shaw because Shaw’s business was struggling, the SEC said.

At a minimum, however, London’s alleged misdeeds have resulted in civil and criminal liability for himself, while creating a PR crisis for KPMG. At the same time, it put KPMG client Herbalife in the awkward position of having to explain why its stock stopped trading briefly Tuesday morning while its auditor was handling fallout from London’s actions and why it suddenly had no auditor.

At 2:58 p.m. EDT today, Herbalife’s stock was showing a gain of 3.68 percent. The company said on Tuesday that KPMG had resigned its account after “it had concluded it was not independent because of alleged insider trading in Herbalife’s securities by one of KPMG’s former partners.”

Among the SEC’s alarming allegations is that Shaw paid London “at least $50,000 in cash that was usually delivered in bags outside of his Encino, Calif. jewelry store.”

For good measure, the SEC alleged, Shaw also provided London “an expensive Rolex watch as well as other jewelry, meals, and tickets to entertainment events.”

“London was honored with the highest trust of public companies, and he crassly betrayed that trust for bags of cash and a Rolex,” said George S. Canellos, acting director of the SEC’s Division of Enforcement.

Using information provided by London, Shaw made more “more than $1.2 million in illicit profits trading ahead of earnings or merger announcements,” the SEC said.

And, the SEC said, London has been charged criminally. (See photo above from FBI criminal complaint filed today against London, who is charged with criminal conspiracy to commit securities fraud through insider trading. Link to the complaint is in the Comments thread below.)

On at least one occasion, “London disclosed nonpublic information in the presence of others during a golf outing,” the SEC charged.

“Prior to public announcements, Shaw received material non-public information from London about numerous earnings announcements and releases of financial results for Herbalife, Skechers [USA Inc.] and Deckers [Outdoor Corp.],” the SEC charged.

Shaw “grossed profits of more than $714,000 from trading based on confidential financial data about Herbalife, Skechers, and Deckers,” the SEC alleged.

But the abuse didn’t stop there, the SEC alleged.

London “also gained access to inside information about impending mergers involving two former KPMG clients – RSC Holdings [Inc.] and Pacific Capital [Bancorp],” the SEC alleged. “London tipped Shaw with the confidential details. Shaw made nearly $192,000 by purchasing RSC Holdings stock the day before its Dec. 15, 2011, merger announcement. He made more than $365,000 in illicit profits from his well-timed purchase of Pacific Capital securities prior to a merger announcement on March 9, 2012.”

“As a leader at a major accounting firm, London’s conduct was an egregious violation of his ethical and professional duties,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.

“KPMG advised the Company it resigned as Herbalife’s independent accountant solely due to the impairment of KPMG’s independence resulting from its now former partner’s alleged unlawful activities and not for any reason related to Herbalife’s financial statements, its accounting practices, the integrity of Herbalife’s management or for any other reason,” Herbalife said on Tuesday.

Herbalife has been the subject of a battle between titans Carl Icahn, who is bullish on the company, and Bill Ackman, who claims Herbalife is a pyramid scheme. On its website, Herbalife denies it is either a pyramid scheme or a Ponzi scheme.

On Thursday afternoon, a federal judge in Los Angeles freed London on a $150,000 bond, ordered him to turn over his passport, and directed the former KPMG auditor not to make contact with Shaw unless in the company of attorneys.

Although Scott London’s take from the insider trading is significant, the harm to society from that his exploitation of that conflict of interest pales in comparison to the damage from the cozy institutional relationships between CPA firms and their clients (as well as between rating agencies and firms putting up the securities to be rated). The institutional conflict of interest in the buyer-pays model multiplies the corruption from that which occurs in a personal conflict of interest. For more on these two type, and this argument, please click on my essay: http://www.thewordenreport.blogspot.com/2013/04/public-accountants-betraying-clients.html at the Worden Report.